The New Paradigm - Federal Reserve Bank of Dallas

4
Exhibit 1
The U.S. Economy:
Gaining Momentum in the ’90s
By virtually any measure—GDP growth, unemployment, national
wealth, inflation and more—the U.S. economy performed better
in the ’90s than it had in decades. Some say the good times
can’t continue. But a deluge of new technologies and industries
made possible by the microprocessor has only begun to reshape
the economy.
25
20
15
10
5
0
7
6
5
4
3
2
1
0
350
300
250
200
150
100
50
0
120
100
80
60
40
20
0
Percent
Percent
Percent
Percent
Growth in GDP per Worker
1970s 1980s 1990s
End-of-Decade Unemployment Rate
1970s 1980s 1990s
Change in Dow Jones Industrial Average
1970s 1980s 1990s
Increase in Consumer Prices
1970s 1980s 1990s
Times this good defy traditional economic analysis. For
at least the past five decades, conventional wisdom held
that a free market economy couldn’t long sustain strong
growth, a low jobless rate and stable prices. Economists
emphasized trade-offs—between unemployment and
inflation, between price stability and growth.
When the economy started to percolate, the thinking
went, surging demand would create supply bottlenecks
and rising wages would ignite inflationary pressures.
Indeed, economic orthodoxy fixated on a “natural rate” of
unemployment—somewhere between 5.5 percent and 6.5
percent—below which the economy couldn’t go without
escalating inflation. Once the inflationary genie was out of
the bottle, the remedy was to brake the economy, which
meant fewer new jobs and more layoffs. The dismal science
reached another dismal judgment: good times can’t
last because prosperity sows the seeds of its own demise.
To avoid ruinous cycles of boom and bust, the best a
mature economy can do is plod along at a growth rate of
2.5 percent a year.
Traditional theories are at a loss to explain the 1990s.
They miss the mark because of sweeping changes in the
U.S. economy. Over the past two decades, a new economy
has emerged from a spurt of invention and innovation, led
by the microprocessor. These thumbnail-size devices serve
as the “brains” for computers and thousands of other products,
some as cutting edge as Doppler radar, others as
mundane as a musical birthday card. The microprocessor’s
ability to manipulate, store and move vast amounts of
information shifted the economy’s center of gravity, creating
the era of smaller, faster, smarter, better, cheaper.
The microprocessor’s myriad spillovers magnify its
impact. The microchip ignited wave after wave of invention
and innovation. New technologies and new products
burst forth, a modern-day alchemy spinning silicon into
gold. The microprocessor and its spillovers forged an Information
Age infrastructure of ever more powerful and
affordable computers, increasingly complex software,
data-dense fiber-optic networks, cellular telephones, satellite
communications, laser scanners and the ubiquitous
Internet.
What’s different about the New Economy? There’s an
unbridled dynamism, flowing from an entrepreneurial cap-
1999 ANNUAL REPORT Federal Reserve Bank of Dallas